The Love and Hate of Dividends
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This post will be a conversation between Me and Myself. I shall be moderating. This may come off a bit crazy, but I'm a crazy person so I can get away with it. The best way I can present this is through a debate format. In favor of dividends, Me. Opposed will be Myself.
I: Are dividends important, gentlemen?
Me: Of course they are! How else can a person make money on stocks?
Myself: You ever try selling one when it's gone up? Or maybe you think American Capital Agency (NASDAQ: AGNC) is going to pay 16% or more forever?
Me: Well, it used to pay 20%...
I (cutting Me off): So it appears dividends are a way to make money. What are your thoughts on the makeup of a good dividend?
Me: A sustainable payout, a great return on the money I put in and the cash to live on with some reinvestment, after the proper payment of my taxes and a little fun money!
Myself: Would you like fries with that?
Me: Yes, I'll buy them with my next Teekay Tankers (NYSE: TNK) dividend, thank you very much.
Myself: I can't believe you trust a company that's gone down 70% since you bought it.
Me: Its dividend is still quite consistent with both its share price and its earnings.
Myself: Yeah, they've all gone down the past few years. Do I need to mention a sinking ship for emphasis?
Me: I'll keep playing that fiddle until we hit the silt at the bottom.
Myself: The only good dividend is a special one, when the company does something really amazing and has a ton of cash to reward you with once. Anything else is just a false promise. Dividends stunt growth and misappropriate funds that could be used for far better things.
Me: Like spending a million bucks on new furnishings for the CEO's office?
Myself: It's a really nice office! Have you seen the pics?
I: Gentlemen, please. Focus. Do you remember the dividend yields of 2005?
Me: Oh baby! 29% off of Novastar, 32% from Northstar (NYSE: NRF), 35% from New Century Financial. Good times, man.
Myself: If I recall correctly, Northstar stagnated for 3 years before it poked its head up, sporting a wimpy little dividend that all but stunted its growth. Novastar was so ashamed of its old ways that it turned into Novation (NASDAQOTH:NOVC.PK) and changed its entire business model. New Century died a horrible death.
Me: Okay, maybe they were a little too ambitious. But companies like Philip Morris (NYSE: PM) and Caterpillar (NYSE: CAT) pay pretty reasonably. They can keep their dividends coming forever, and stack up nice numbers on every side.
Myself: I guess... but as of July 3rd, 2012, Caterpillar is only yielding 2.41% on its dividend. That won't even cover inflation, let alone taxes. Why pay a dividend at all if it's going to be so tiny? Why not just pump that dough back into making the company even stronger?
Me: That's so either-or. Dude, this is a gray area thing. The fact that Philip Morris is paying 5%, and is an otherwise solid company with superb brands means that it can grow and pay you a little something. You're just ticked off that we can't retire on $50,000 in investments like you were hoping for.
I: So it appears that dividends are open to love for their potential for income, and hate for their potential to disappoint. This debate appears to be a draw. Perhaps someone in the comments section can render a tie-breaking argument for or against the dividend, and perhaps a justification for a particular level of dividend payout.
A person could go crazy thinking about this too much...
Motley Fool blogger Chris Hodge owns shares of AGNC, TNK and NRF, but has no position in any other companies mentioned. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.